United Kingdom: Government extends forfeiture moratorium and rent recovery restrictions to 31 March 2021, and announces a review of commercial landlord and tenant legislation

In brief

The UK Government has announced today, 9 December 2020, that the moratorium on forfeiture of commercial leases for non-payment of rent will be extended to 31 March 2021. The Secretary of State has indicated that this will be its final moratorium, and that "those that are able to pay their rent should do so." The restrictions on using Commercial Rent Arrears Recovery (CRAR), and on the service of statutory demands and winding up petitions will similarly be extended to 31 March 2021. The government has also announced a review of commercial landlord and tenant legislation to address concerns that the existing framework does not address the current economic climate.


In summary

  • Under section 82 of the Coronavirus Act 2020, the government introduced a temporary suspension of landlords' rights to forfeit business leases for non-payment of rent until 30 June 2020. This has subsequently been extended twice, on a quarterly basis; to 30 September 2020 and then to 31 December 2020. The moratorium will now be extended a third time, to 31 March 2021.
  • The limitations on use of CRAR have been similarly extended to 31 March 2021, though any conditions attaching to such extension are not yet known.
  • The restrictions on service of statutory demands and winding-up petitions imposed by the Corporate Insolvency and Governance Act 2020 (CIGA) will be extended to 31 March 2021.
  • The Code of Practice introduced on 19 June 2020 continues to apply until at least 24 June 2021. This temporary, voluntary and non-binding code encourages fair and transparent discussions between landlords and tenants over rental payments during the COVID-19 pandemic, and includes guidance on rent arrear payments. See our client alert here. Additional guidance will be published in early 2021 to sit alongside the Code.
  • A government review of "outdated" commercial landlord and tenant legislation is proposed to consider better collaboration between parties, and to ensure the recovery of high streets and town centres.

In detail

The Communities Secretary has announced an extension to the moratorium on forfeiture of commercial leases for non-payment of rent to 31 March 2021.

Rent, insurance, service charge and interest will continue to accrue, but landlords will need to wait out another payment quarter before employing forfeiture action as a means of reclaiming and remarketing premises. There are currently other restrictions in place which protect "under strain" commercial tenants, including limitations on use of CRAR, and restrictions on service of statutory demands and winding-up petitions. These have been extended to 31 March 2021.

The government has also announced that further guidance will be published in early 2021 to supplement the Code of Practice for commercial landlords and tenants, which continues to apply until at least 24 June 2021. This is intended to "encourage all parties to work together to protect viable businesses and ensure a swift economic recovery".

The extension to the moratorium on forfeiture comes as commercial tenants approach the close of another difficult quarter. The national lockdown which ended on 2 December required the closure of non-essential retail stores, and much of the UK is still subject to a recommendation to work from home where possible. Although rent recovery for the September quarter was reportedly better than expected, it is still down in comparison to the same quarter in 2019.

Tenant perspective

Tenant bodies such as the British Retail Consortium had called for the moratorium to be extended, citing the extremely difficult trading conditions. The extent to which some retail tenants are under strain is evidenced by the rising number of retail tenant CVAs, many of which come hand-in-hand with a restructure of rent obligations under leases, such as a move to turnover rents. To alleviate some of the shorter-term financial impact of COVID-19, many tenants have agreed concessionary rent arrangements with their landlords during 2020 such as rent freezes, reduced rents, switching to turnover only rents or alternative rent payment periods. Looking to the longer term, even outside of the CVA process, tenants are rebalancing risk and seeking a more nimble portfolio by negotiating turnover rent arrangements and, in some cases, shorter-term leases with clearer exit mechanisms such as tenant-only breaks with minimal conditionality.

Landlord perspective

In contrast, the British Property Federation had previously called, on behalf of landlords, for the moratorium to be lifted. This comes amidst growing concerns about the impact of non-payment of rent, or restructuring of rental commitments, on landlords' own loan covenants with their funders. In order to recoup unpaid rent where possible, many landlords have started to pursue other lesser-used remedies such as county court judgments. There are limited other available enforcement options during the moratorium. Landlords do retain the ability to forfeit for other lease covenant breaches, though this is possibly an expensive and uncertain option, with tenants retaining their right to seek relief. Additionally, landlords can still claim against a guarantor (whether a standalone lease guarantor or under a statutory Authorised Guarantee Agreement), and under any rent deposit, if rent is unpaid or the tenant is in breach of its other lease covenants.

Commentary

The moratorium's extension provides timely relief for tenants, particularly in the retail and hospitality sectors, for whom a second lockdown put the brakes on a pre-Christmas economic upturn. However the government has been clear that this is the final extension to the moratorium. Tenants therefore need to be making firm plans to address their accrued and ongoing lease liabilities in anticipation of a definite lifting of the moratorium shortly after the March quarter day. Landlords now have greater certainty as to when their enforcement options will resume, which should facilitate strategic discussion with their own stakeholders.

The government's intention to review "outdated" commercial landlord and tenant legislation is unexpected. The review will be launched early in 2021 and will consider a broad range of issues including the Landlord & Tenant Act 1954 Part II, different models of rent payment, and the impact of Coronavirus on the market. The government's aim is to focus on better collaboration and an improved leasing process to allow high streets and town centres to thrive. All parties involved in commercial real estate will need to look out for the government's future announcements in relation to this review of landlord and tenant legislation. Whether it will push the market in the same direction that it is already travelling remains to be seen.

For further information and to discuss what these measures might mean for you, please get in touch with your usual Baker McKenzie contact.


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